Applies to: Every employer with employees who work or live in Indiana. This is a 🏎️ Indiana-specific update.
Indiana's flat income tax rate continues to drop, hitting 2.95% for 2026 — down from 3.0% in 2025. But that's not the only change. Six counties raised their local income tax rates, the OBBBA creates new federal conformity benefits, and a massive increase in the business personal property exemption could save your company thousands.
Here's the complete payroll guide for Indiana employers in 2026.
Indiana State Income Tax: The Rate Reduction Roadmap
| Tax Year | Flat Rate | Status |
|---|---|---|
| 2023 | 3.15% | Completed |
| 2024 | 3.05% | Completed |
| 2025 | 3.00% | Completed |
| 2026 | 2.95% | Current year |
| 2027 | 2.90% | Scheduled |
| 2030 (target) | 2.55% | Revenue-dependent |
For payroll purposes, the 2.95% state withholding rate took effect January 1, 2026. If your payroll system hasn't updated yet, verify it immediately. Supplemental wage withholding also drops to 2.95%.
The County Tax Problem: 92 Rates, and 6 Just Changed
Unlike Georgia (zero local taxes) or Florida (no income tax at all), Indiana requires employers to withhold county income tax for all 92 counties. The rate depends on where the employee lives, not where they work.
Six counties increased their rates for 2026:
| County | 2026 Rate | Change |
|---|---|---|
| Carroll | Increased | ⬆ Rate up |
| Grant | Increased | ⬆ Rate up |
| Greene | Increased | ⬆ Rate up |
| Howard | Increased | ⬆ Rate up |
| Shelby | Increased | ⬆ Rate up |
| Union | Increased | ⬆ Rate up |
⚠️ This is a common payroll mistake: Indiana county tax is based on the employee's county of residence, not the employer's county. If an employee moves mid-year, you must update their county tax rate. This is one reason Indiana payroll is more complex than Georgia or Florida.
OBBBA Conformity: No Tax on Overtime or Tips in Indiana
Indiana is aligning with the federal One Big Beautiful Bill Act for the 2026 tax year. This means:
- No state or county income tax on qualified overtime — matching the federal deduction of up to $12,500 ($25,000 MFJ)
- No state or county income tax on qualified tips — matching the federal deduction of up to $25,000
- These deductions do not affect FICA (Social Security/Medicare)
Employers must still track and report these amounts on W-2 forms using the new Box 12 codes. See our OBBBA W-2 guide.
Business Personal Property Exemption: $80K to $2M
This is a massive change for Indiana businesses. The personal property tax exemption is increasing from $80,000 to $2,000,000 starting in 2026. This means most small and mid-size businesses will no longer owe personal property tax on equipment, furniture, and machinery.
If your business has personal property valued under $2 million, you may no longer need to file a personal property return in Indiana. Consult your accountant to confirm eligibility.
Unemployment Insurance (SUI) for 2026
| Detail | 2026 |
|---|---|
| Taxable wage base | $9,500/employee |
| New employer rate | 2.5% |
| Experienced employer range | 0.50% – 7.40% |
| Voluntary contribution option | Yes — can lower your rate |
Other Indiana Employer Updates for 2026
Minimum Wage
Indiana's minimum wage remains at $7.25/hour, unchanged and matching the federal minimum. There are no increases currently scheduled at the state level. Some Indiana cities have attempted local increases but they do not apply to private employers under current state law.
Indiana Consumer Data Protection Act
The Indiana Consumer Data Protection Act takes full effect in 2026, giving Indiana residents new rights over their personal data. Employers who collect personal data from Indiana residents (including employees) must comply with new transparency, consent, and data security requirements.
Child Labor Law Changes
A bill passed by the Indiana Senate in 2026 would eliminate the requirement for businesses to document the employment of minor workers. If signed, this simplifies hiring for employers who employ workers under 18.
✅ iSolved handles all of this. State rate changes, all 92 county tax rates, OBBBA conformity reporting, and SUI calculations are updated automatically in iSolved People Cloud. BlueWave HR monitors these changes so you don't have to. When Carroll County raises its rate, your next payroll already reflects it.
Why Indiana Payroll Is More Complex Than You Think
Indiana looks simple on the surface — a low flat state tax rate. But the 92 county income taxes add a layer of complexity that catches many employers off guard. Consider:
- Each county has its own rate (ranging from ~0.5% to over 3%)
- The rate is based on where the employee lives, not works
- Employees who move mid-year require a rate change
- Rates change periodically across multiple counties
- You must track county of residence for every Indiana employee
This is exactly the kind of compliance complexity that a payroll partner like BlueWave HR eliminates. Our clients never worry about which county raised its rate — iSolved handles it automatically.
FAQ
What is Indiana's state income tax rate for 2026?
2.95%, down from 3.0% in 2025. Further reductions are planned: 2.9% in 2027, and potentially 2.55% by 2030.
Which Indiana counties raised their income tax in 2026?
Carroll, Grant, Greene, Howard, Shelby, and Union — all effective January 1, 2026.
Does Indiana follow the OBBBA no-tax-on-overtime and tips rules?
Yes. Indiana is conforming to the federal provisions, meaning qualified overtime and tip income will not be subject to state or county income tax for 2026.
What is Indiana's unemployment tax rate for 2026?
Taxable wage base is $9,500/employee. New employers pay 2.5%. Experienced rates range from 0.50% to 7.40%.
Operating in Indiana? We've Got Your 92 Counties Covered.
BlueWave HR serves businesses across Indiana from our Indianapolis presence. 10 years in business, every county tax rate automated, every OBBBA change handled. Let us take payroll off your plate.
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